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Item 2. Management’s Discussion and Analysis

2023-11-01 compared with 2023-07-28 · 151 added, 158 removed, 222 unchanged (58% of the section changed)

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Overview and Outlook

The second quarter of 2023 continued to see increased new home demand similar with the first quarter of this year as compared to the latter half of 2022.

Homebuyers have begun to acclimate to higher interest rates and their previous hesitancy to purchase a home during uncertain economic conditions has adjusted accordingly.

Despite the normalization of higher interest rates, homebuyers are still looking for assistance with monthly mortgage affordability, primarily in the form of interest rate locks or buy-downs.

While there is a continuing lack of visibility in the economy, demand has been healthy in 2023.

We expect the housing undersupply in the resale market and favorable demographics to provide a strong long-term runway for future homebuying demand, particularly for affordable, quick move-in homes, and believe that our all-spec strategy with a commitment to finding the market price will allow us to meet the demand and continue to grow our market share.

Production costs continue to be elevated due to persistent inflation but have come down slightly from the second quarter of 2022.

We expect that over the long term, costs will decline and cycle times will continue to shorten and stabilize as the homebuilding market returns to normal levels.

We reduced our construction cycle time by over three weeks for new home starts in the second quarter of 2023 as compared to the first quarter, nearing our historical averages.

Demand for new homes in the third quarter of 2023 held steady with that experienced in first half of the year, despite the persistence of elevated interest rates and high inflation.

This environment has homebuyers looking for assistance with monthly mortgage affordability, requiring greater use of financing incentives, including interest rate locks and buy-downs.

Millennial and baby boomer generations are seeking affordable, move-in ready homes that meet their changing lifestyle needs, which has created elevated demand for new inventory, as existing homeowners with lower mortgage rates are not listing their homes, resulting in a short supply of total inventory.

We believe our all-spec strategy with a commitment to affordability will meet the persisting demographic demand, providing us with ample opportunity to capture and grow our market share.

While we have experienced some limited relief in material costs, primarily due to the retraction in lumber commodities, most other home costs have held relatively steady at their elevated levels.

Our cost savings year over year were primarily generated by improvements in our construction cycle time.

During the third quarter of 2023, we further reduced our construction cycle time by over two weeks as supply chain and labor constraints have continuously lessened throughout the year.

We continue to rebid all of our construction inputs and expect costs to begin to trend down to historical levels as the economy resets into stabilizing inflation rates.

Higher land development costs have also begun to impact margins for newer communities and will continue to do so in the near-to-mid term.

Summary Company Results

We achieved record second quarter home closing revenue and units volume of $1.5 billion on 3,490 homes, up from $1.4 billion on 3,221 homes closed in the second quarter of 2022.

The 9.5% increase in home closing revenue year-over-year was driven primarily by the 8.4% higher volume and aided by a 1.1% increase in average sales price ("ASP") on closings.

ASP on closings improved despite increased incentives due to a favorable mix of closings in higher-priced markets.

Second quarter home closing gross margin declined to 24.4% for home closing gross profit of $377.0 million compared to 31.6% and $444.7 million, respectively, in the second quarter of 2022.

The margin deterioration is due primarily to the increased incentives offered in response to the market slowdown that began in 2022.

Financial services loss of $2.6 million in the second quarter of 2023, as compared to profit of $4.1 million in 2022, reflects $7.9 million of charges taken for unused prepaid interest rate locks that expired during the period.

Commissions and other sales costs of $95.8 million in the three months ended June 30, 2023 increased $26.4 million due to higher home closing revenue and higher broker commission rates paid in response to current market conditions.

General and administrative expenses of $52.1 million in the three months ended June 30, 2023 were 3.4% of home closing revenue, consistent with the same period in 2022.

Other income, net of $12.9 million increased from a net expense of $0.5 million in the prior year primarily due to the higher interest rate earned on a larger cash balance.

Earnings before income taxes for the second quarter of 2023 of $239.5 million decreased $92.2 million year over year from $331.7 million in 2022.

The lower effective income tax rate of 22.0% compared to 24.6% in 2022 reflects the benefit from earned eligible energy tax credits on qualifying homes under the Inflation Reduction Act ("IRA") enacted in August 2022.

The decrease in year-over-year profitability partially offset by a lower tax rate, resulted in net earnings of $186.8 million in the second quarter of 2023 versus $250.1 million in the second quarter of 2022.

Similar to the second quarter, 5.1% higher home closing volume led to a 5.7% improvement in home closing revenue for the six months ended June 20, 2023 versus 2022.

Home closing gross margin of 23.5% declined 750 basis points year over year, for a $162.9 million decrease in home closing gross profit.

Lower gross margin, profitability and a lower effective tax rate of 21.4% led to net income of $318.1 million for the six months ended June 30, 2023, compared to $467.3 million for the 2022 period.

Home orders of 3,340 for the quarter ended June 30, 2023 were 11.3% lower than the second quarter of 2022 on a relatively flat average active community count, reflecting an 11.4% decrease in orders pace to 3.9 per month compared to 4.4 in 2022.

The lower orders pace in the second quarter of 2023 was primarily from the timing of community openings and closings with a disproportionate share of closings in the first month of the quarter and openings in the last month of the quarter.

Home order value decreased 18.5% year-over-year, to $1.5 billion during the three months ended June 30, 2023, versus $1.8 billion in the same period of 2022, due to the lower volume as well as an 8.1% decrease in ASP on orders.

The lower ASP on orders year over year is due to increased incentives to assist homebuyer affordability, primarily related to interest rates.

Our cancellation rate returned to a more normalized 12% in the second quarter of 2023, down sequentially from 15% in the first quarter of 2023 and 13% in the second quarter of 2022.

Similar to the second quarter, for the six months ended June 30, 2023, home orders and home order value decreased 10.7% and 16.7%, respectively, over the prior year, with a cancellation rate of 13% compared to 11% for the prior year period.

We ended the second quarter of 2023 with 3,772 homes in backlog valued at $1.7 billion, decreases of 47.9% and 50.9%,

respectively, from June 30, 2022.

The decrease in backlog units is due to an 89.0% backlog conversion rate during the second quarter of 2023 combined with lower order volume.

We ended the second quarter of 2023 with 291 active communities, down from 303 at June 30, 2023 although up sequentially from 278 at March 31, 2023.

We purchased approximately 5,700 lots for $241.6 million, spent $477.0 million on land development and started construction on 6,558 homes during the six months ended June 30, 2023.

We achieved record third quarter home closing revenue and units volume of 3,638 homes valued at $1.6 billion in the third quarter of 2023, improving 4.3% and 2.6%, respectively, year over year.

The increase in home closing revenue was driven by the higher volume as the average sales price ("ASP") on closings decreased 1.6% due to higher incentives.

Third quarter home closing gross margin of 26.7% for home closing gross profit of $429.6 million compared to 28.7% and $450.6 million, respectively, in the third quarter of 2022.

The 200 basis point margin deterioration is due primarily to increased incentives and higher land development costs, while direct costs held relatively steady.

Commissions and other sales costs of $99.1 million in the three months ended September 30, 2023 increased $21.2 million due to the combined effect of higher home closing volume and increased commissions offered in response to the current sales environment.

General and administrative expenses of $63.1 million were 3.9% of home closing revenue for the three months ended September 30, 2023, compared to $48.4 million, or 3.1% of home closing revenue, for the same period in 2022.

The increase in General and administrative expenses is due to higher compensation, inclusive of newer market operations and competitive market adjustments.

Other income, net of $13.3 million increased from a net other expense of $0.1 million in the prior year primarily due to higher interest rates earned on a larger cash balance.

In September 2023 we partially redeemed $150.0 million of our 2025 Notes, resulting in charges of $0.9 million reflected in Loss on early extinguishment of debt, with no similar charges in 2022.

Earnings before income taxes for the third quarter of 2023 of $285.7 million decreased $43.8 million year over year from $329.5 million in 2022.

The effective income tax rate for the third quarter of 2023 was 22.4%, compared to 20.3% in 2022.

The 2022 effective tax rate reflects the catch-up of tax credits for energy efficient homes closed in the first nine months of 2022 for the extension of the §45L energy-efficient homes federal tax credit enacted by the IRA in third quarter of 2022.

The decrease in year-over-year profitability and a higher tax rate, resulted in net earnings of $221.8 million in the third quarter of 2023 versus $262.5 million in the third quarter of 2022.

For the nine months ended September 30, 2023, home closing volume of 10,025 units increased 4.8% from 2022, leading to a 4.5% increase in home closing revenue to $4.4 billion.

Home closing gross margin of 24.7% decreased 540 basis points, resulting in a $184.0 million decrease in home closing gross profit.

Lower gross margin and profitability, partially offset by a lower effective tax rate of 21.8%, led to net income of $539.9 million for the nine months ended September 30, 2023, compared to $729.8 million for the 2022 period.

Home orders of 3,474 for the quarter ended September 30, 2023 were 50.4% higher than the third quarter of 2022, as market conditions stabilized over the last twelve months, increasing consumer confidence and buyer demand, and our cancellation rate in the third quarter of 2023 of 11% improved significantly from the elevated 30% in the third quarter of 2022.

Our average active community count decrease of 2.6% for the third quarter of 2023 was overshadowed by a 51.9% increase in orders pace to 4.1 per month compared to 2.7 in the 2022 third quarter.

Home order value increased 53.5% year-over-year, to $1.5 billion during the three months ended September 30, 2023, versus $1.0 billion in the same period of 2022, due to the

higher volume and a 2.1% increase in ASP on orders.

The higher ASP on orders year over year is due to geographic mix, with a greater proportion of orders in higher ASP markets in the third quarter of 2023 as compared to 2022.

For the nine months ended September 30, 2023, home orders increased 3.5% and home order value decreased 1.6% over the prior year, with a cancellation rate of 13% compared to 16% for the prior year period.

We ended the third quarter of 2023 with 3,608 homes in backlog valued at $1.6 billion, decreases of 40.5% and 44.9%, respectively, from September 30, 2022.

The decrease in backlog units is due to a 96.4% backlog conversion rate during the third quarter of 2023.

We ended the third quarter of 2023 with 272 active communities, down from 275 at September 30, 2022 as our accelerated orders pace resulted in early community close outs.

We purchased approximately 9,100 lots for $486.0 million, spent $769.7 million on land development and started construction on 10,547 homes during the nine months ended September 30, 2023.

Company Positioning

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• Increasing homeowner satisfaction by offering healthier, energy-efficient homes that come equipped with a suite of home automation standard features.

Our efforts were recognized in the second quarter of 2023 with the 2023 ENERGY STAR ® Residential New Construction Market Leader Award from the Environmental Protection Agency.

In addition to these strategic initiatives, we also remain committed to the following:

• Carefully managing our liquidity and a strong balance sheet;

we ended the second quarter with a 21.4% debt-to-capital ratio and a (0.2)% net debt-to-capital ratio;

• Carefully managing our liquidity and a strong balance sheet, including a $150.0 million early redemption of debt this quarter;

we ended the third quarter with an 18.5% debt-to-capital ratio and a (1.0)% net debt-to-capital ratio;

• Maximizing returns to our shareholders through improved financial performance, dividend payments and share repurchases;

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• Promoting a positive environment for our employees through our commitment to foster diversity, equity, and inclusion ("DE&I") and providing market-competitive benefits in order to develop and motivate our employees and to minimize turnover and to maximize recruitment efforts;

• Maintaining a solid orders pace through the use of our consumer and market research to ensure that we build homes that offer our buyers their desired features and amenities;

• Continuing to innovate and promote our energy efficiency program and our M.Connected ® Automation Suite to create differentiation for the Meritage brand.

• Targeting a strong yet sustainable orders pace through the use of our consumer and market research to ensure that we build homes that offer our buyers their desired features and amenities;

• Continuing to innovate and promote our energy efficiency program and our M.Connected ® Automation Suite to create differentiation from existing available inventory.

Critical Accounting Estimates

The critical accounting estimates that we deem to involve the most difficult, subjective or complex judgments include valuation of real estate and cost of home closings, warranty reserves and valuation of deferred tax assets.

There have been no significant changes to our critical accounting estimates during the six months ended June 30, 2023 compared to those disclosed in Item 7.

There have been no significant changes to our critical accounting estimates during the nine months ended September 30, 2023 compared to those disclosed in Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our 2022 Annual Report on Form 10-K.

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The tables on the following pages present operating and financial data that we consider most critical to managing our operations (dollars in thousands):

Home Closing Revenue Three Months Ended June 30, Quarter over Quarter

Home Closing Revenue Three Months Ended September 30, Quarter over Quarter

2023 2022 Change $ Change %

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Average sales price $ 403.8 $ 405.1 $ (1.3) (0.3) %

Six Months Ended June 30, Quarter over Quarter

Nine Months Ended September 30, Quarter over Quarter

2023 2022 Change $ Change %

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Average sales price $ 401.8 $ 398.1 $ 3.7 0.9 %

Home Orders (1) Three Months Ended June 30, Quarter over Quarter

Home Orders (1) Three Months Ended September 30, Quarter over Quarter

2023 2022 Change $ Change %

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Average sales price $ 395.2 $ 393.7 $ 1.5 0.4 %

Six Months Ended June 30, Quarter over Quarter

Nine Months Ended September 30, Quarter over Quarter

2023 2022 Change $ Change %

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Order Backlog (1)

At June 30, Quarter over Quarter

At September 30, Quarter over Quarter

2023 2022 Change $ Change %

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Active Communities and Cancellation Rates

Active Communities Three Months Ended June 30, Six Months Ended June 30,

Active Communities Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

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Cancellation Rates (2)

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

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Companywide .

We had our highest second quarter home closing revenue and volume in Company history, improving 9.5% and 8.4%, respectively, over prior year, with 3,490 closings valued at $1.5 billion for the three months ended June 30, 2023, compared to 3,221 closings valued at $1.4 billion in 2022.

Despite entering the 2023 second quarter with lower backlog than prior year, home closing volume increased 8.4% over the second quarter of 2022 due to a backlog conversion rate of 89.0%, as compared to 48.1% in the prior second quarter period.

Home order volume declined by 11.3% to 3,340 homes as compared to 3,767 homes in the second quarter of 2022, primarily due to an 11.4% decline in orders pace of 3.9 per month, down from 4.4 per month in the same period of 2022.

Home order value of $1.5 billion declined 18.5% from the second quarter of 2022 due to the decrease in order volume combined with an 8.1% lower ASP on orders as we increased incentives to meet the market's need for affordability impacted by successive interest rate hikes.

Order cancellations of 12% for the second quarter of 2023 improved slightly from 13% in the second quarter of 2022 and are in line with historical averages for the Company.

For the six months ended June 30, 2023, home closing volume increased 5.1% to 6,387 closings, which combined with a 0.6% year-over-year increase in ASP on closings led to home closing revenue of $2.8 billion, up 5.7% from $2.7 billion in the prior year period.

Similar to the second quarter, home order volume of 6,827 was down 10.7% from prior year due to a 10.9% decrease in orders pace that was partially offset by a 1.2% increase in average active communities.

As demand returns to normalized levels, our 2023 year-to-date orders pace of 4.1 homes per month was down from the elevated pace of 4.6 in 2022 but still exceeded our target of 4 homes per month.

The lower order volume and a 6.7% decrease in ASP on orders led to 16.7% decrease in order value of $3.0 billion.

We ended the second quarter of 2023 with 291 actively selling communities, down from 303 June 30, 2022 but up sequentially from 278 at March 31, 2023.

The quarter ended with 3,772 homes in backlog valued at $1.7 billion, compared to 7,241 units valued at $3.4 billion at June 30, 2022, due to entering the quarter with fewer homes in backlog, higher home closing volume, higher backlog conversion rate and lower orders.

The West Region generated $519.2 million in home closing revenue on 997 homes in the second quarter of 2023, up from $486.1 million on 925 homes in the prior year period.

We had our highest third quarter home closing revenue and volume in Company history, improving 2.6% and 4.3%, respectively, over prior year, with 3,638 closings valued at $1.6 billion for the three months ended September 30, 2023, compared to 3,487 closings valued at $1.6 billion in 2022.

Despite entering the 2023 third quarter with lower backlog than prior year, home closing volume increased over the third quarter of 2022 due to a backlog conversion rate of 96.4% versus 48.2% in the prior year.

The improvement in backlog conversion was bolstered by reduced cycle times combined with 31.6% of our third quarter 2023 home closings also being sold within the same quarter.

Order cancellations of 11% for the third quarter of 2023 improved greatly from 30% in the third quarter of 2022, resulting in a 50.4% increase in home order volume of 3,474 homes, compared to 2,310 homes in the third quarter of 2022, and our orders pace improved 51.9% to 4.1 per month from 2.7 per month.

ASP on orders increased 2.1% due to geographic mix, which combined with the higher order volume for a 53.5% increase in home order value of $1.5 billion.

For the nine months ended September 30, 2023, home closing revenue of $4.4 billion increased 4.5% from $4.2 billion, due to a 4.8% increase in home closing volume to 10,025, up from 9,566 homes in the prior year period, as ASP on closings was relatively flat.

Home order volume of 10,301 increased 3.5% from prior year due primarily to a 2.5% increase in orders pace of 4.1 homes per month, up from 4.0 in 2022, on a relatively consistent average active community count.

Despite the increase in order volume, home order value decreased 1.6% from prior year due to increased incentives that caused ASP on orders to decline 5.0%.

We ended the third quarter of 2023 with 272 actively selling communities, down from 275 at September 30, 2022.

At September 30, 2023, we had 3,608 homes in backlog valued at $1.6 billion, down from 6,064 units valued at $2.8 billion at September 30, 2022, due to a higher backlog conversion rate and improved cycle times.

The West Region generated $606.8 million in home closing revenue on 1,172 homes in the third quarter of 2023, up from $590.0 million on 1,086 homes in the prior year period.

The 7.9% increase in volume resulted in a 2.8% increase in home closing revenue, as ASP on closings decreased 4.7% due to higher incentives.

Home orders in the second quarter of 2023 of 990 were down 7.9% from 1,075 in the prior year, despite a 3.2% increase in average active communities due to a 10.5% decrease in orders pace to 3.4 homes per month from 3.8 per month in 2022.

Home order value of $515.3 million for the second quarter of 2023 decreased 18.5% from prior year, due to the decrease in order volume coupled with lower ASP.

The West Region had some of the most significant price increases over the past few years and accordingly has required the steepest sales price adjustments to find the market clearing price.

In response, we have increased incentives in the Region, resulting in an 11.5% decrease in ASP on orders.

The West Region cancellation rate of 15% in the second quarter of 2023 improved from 17% in the prior year.

For the six months ended June 30, 2023, home closing revenue of $936.5 million decreased 1.4% due to slight declines in both home closing volume and ASP on closings.

Home closing volume gains in both California and Colorado were offset by a decrease in Arizona, and all markets experienced a decrease in ASP on closings.

Order volume in the West Region increased 4.4% year-to-date due entirely to an 8.2% increase in the average number of actively selling communities, as year-to-date orders pace decreased 2.4% to 4.0 homes per month.

ASP on orders decreased 11.5%, and home order value of $1.2 billion was down 7.6% from the combined effect of higher volume and lower ASPs.

The year-to-date cancellation rate of 14% is consistent with the prior year period.

The West Region ended the second quarter of 2023 with 1,366 homes in backlog valued at $669.6 million, compared to 2,257 units valued at $1.3 billion at June 30, 2022, decreases of 39.5% and 46.8%, respectively.

The Central Region closed 1,094 homes in the three months ended June 30, 2023, up 4.4% from 1,048 in 2022.

Home closing revenue of $456.8 million increased 8.2%, driven by the increased volume and a 3.6% increase in ASP on closings from geographic mix.

Home order volume decreased 2.8% to 1,065 homes in the second quarter of 2023, despite a 5.8% increase in average active communities, due to an 8.5% decrease in orders pace to 4.3 homes per month.

Demand remains high in the Central Region, although is returning closer to normalized levels in 2023 from the elevated pace of 4.7 per month in the second quarter of 2022.

The lower order volume combined with a 7.8% decrease in ASP on orders drove a decrease in order value of 10.4%, to $440.4 million in the second quarter of 2023, from $491.4 million in the prior year quarter.

The Central Region had significant improvement in its cancellation rate of 11% in the second quarter of 2023, down year over year and sequentially from 17% in both the second quarter of 2022 and the first quarter of 2023.

Year-to-date results in the Central Region were similar to those of the second quarter.

For the six months ended June 30, 2023, home closing revenue of $881.7 million on 2,142 home closings increased and 14.5% and 11.5%, respectively.

Orders and ASP on orders both declined year-over-year, down 10.6% and 7.4%, respectively, resulting in a 17.2% decrease in order value of $860.9 million on 2,138 homes.

Order volume was lower due to a 15.4% decrease in orders pace, as the Region increased their average active community count by 7.4%.

While orders pace decreased compared to prior year, the Central Region orders pace exceeded our target of 4 homes per month at 4.4, down from an elevated 5.2 in 2022.

The year-to-date

cancellation rate of 14% is consistent with prior year.

The Central Region ended the quarter with 959 units in backlog valued at $401.6 million, down 59.2% and 61.5%, respectively, compared to June 30, 202.

During the three months ended June 30, 2023, the East Region closed 1,399 homes for $567.0 million, compared to 1,248 closings and $500.5 million in home closing revenue in the comparable prior year period.

The 12.1% increase in volume due to improved backlog conversion and closings from our new markets in 2023, coupled with a 1.0% increase in ASP on closings resulted in 13.3% higher home closing revenue.

With 7.5% fewer average active communities and a 12.8% decline in orders pace, home orders fell 19.5% to 1,285 in the second quarter of 2023 from 1,596 in the prior year.

Similar the Central Region, the East Region orders pace of 4.1 homes per month in the second quarter of 2023 exceeded our target pace of 4 per month and is returning closer to normalized levels in 2023 from the elevated orders pace of 4.7 per month in 2022.

The cancellation rate increased to 9% in the second quarter of 2023 from 7% in the second quarter of 2022, although sequentially is down significantly from 15% in the first quarter of 2023.

Home order value of $519.0 million decreased 24.4% from $686.2 million in the prior year period due to the decreased volume and a 6.1% reduction in ASPs.

The year-to-date results of the East Region were similar to those of the second quarter, with 4.0% and 5.6% improvements in home closing volume and revenue, respectively, compared to the 2022 period, closing 2,463 homes for $986.7 million in home closing revenue for the six months ended June 30, 2023.

Orders volume decreased 21.4% due to the combined impact of an 8.7% decrease in average active communities and a 15.2% decrease in orders pace for the six months ended June 30, 2023.

Order value of $969.4 million decreased 25.0% year over year due to decreased volume and a 4.6% decrease in ASP on orders.

Year-to-date, the East Region's cancellation rate of 12% is up from 7% in the prior year, although still in line with historically normal rates.

The East Region ended the second quarter of 2023 with 1,447 homes in backlog valued at $616.3 million, down 45.1% and 45.8%, respectively, from 2,635 homes valued at $1.1 billion at June 30, 2022.

Home orders in the third quarter of 2023 of 985 were up 116.0% from 456 in the prior year, as the buyer hesitancy and elevated cancellations in the third quarter of 2022 have dramatically lessened as the economy stabilizes coupled with increased incentives to alleviate affordability concerns.

The West Region cancellation rate of 14% in the third quarter of 2023 improved from 43% in the prior year, resulting in a 140.0% higher orders pace of 3.6 homes per month in the third quarter of 2023 compared 1.5 per month in 2022.

This accelerated orders pace contributed to a 12.9% decrease in average active communities due to early close outs.

Home order value of $521.0 million for the third quarter of 2023 increased proportionately with order volume, as ASP on orders remained consistent.

For the nine months ended September 30, 2023, home closing revenue of $1.5 billion was consistent with prior year, as a 2.7% increase in home closing volume was offset by a 2.4% decrease in ASP on closings.

Order volume in the West Region increased 23.7% year-to-date driven by a return to more normalized demand.

With just a 1.1% increase in average active communities, year-to-date orders pace of 3.9 homes per month improved 21.9% compared to 2022, although last year's orders pace was negatively impacted by elevated cancellations.

Home order value of $1.7 billion was up 12.5% from 2022 due to higher volume, offset by a 9.1% decrease in ASP on orders caused by increased buyer financing incentives.

The year-to-date cancellation rate of 14% was down from 21% in the prior year period.

The West Region ended the third quarter of 2023 with 1,179 homes in backlog valued at $579.8 million, compared to 1,627 units valued at $905.1 million at September 30, 2022, decreases of 27.5% and 35.9%, respectively.

The Central Region closed 1,102 homes in the three months ended September 30, 2023, down 9.5% from 1,218 home closings in 2022, which was the Region's highest quarterly home closings in its history.

Home closing revenue of $452.7 million decreased 9.4% due to lower home closing volume as ASP on closings was flat.

The Central Region cancellation rate of 13% in the third quarter of 2023 was down from 37% in the third quarter of 2022, resulting in significant improvement in home order volume and orders pace.

Home order volume increased 73.1% to 1,099 homes in the third quarter of 2023 due to a 6.5% increase in average active communities coupled with a 66.7% increase in orders pace to 4.5 homes per month from 2.7 in 2022.

Order value of $425.2 million in the three months ended September 30, 2023 increased 67.8% from $253.3 million in the third quarter of 2022 due to entirely to the higher order volume, as the Region experienced a 3.0% decrease in ASP on orders resulting from higher incentives year over year.

Year-to-date, Central Region home closing revenue of $1.3 billion on 3,244 home closings increased 5.1% and 3.3%, respectively, from the nine months ended September 30, 2022, and ASP on home closings increased 1.7%, buoyed by favorable results in the first half of 2023 which more than offset the difficult third quarter comparisons.

Home order volume of 3,237 for the nine months ended September 30, 2023 increased 6.9% because of a higher average active community count, as orders pace of 4.4 homes per month was consistent with the same period in 2022.

ASP on orders declined 7.0% year-over-year, resulting in a 0.6% decrease in order value of $1.3 billion.

The year-to-date cancellation rate of 14% was down from 20% in the prior year.

The Central Region ended the quarter with 956 units in backlog valued at $370.3 million, down 45.9% and 53.1%, respectively, compared to September 30, 2022.

During the three months ended September 30, 2023, the East Region closed 1,364 homes for $550.8 million in home closing revenue, compared to 1,183 closings and $479.3 million in the comparable prior year period.

The 15.3% increase in home closing volume resulted in a 14.9% improvement in home closing revenue while ASP on closings held steady.

Home orders of 1,390 valued at $549.3 million for the third quarter of 2023 increased 14.0% and 14.5%, respectively, due to a 13.2% increase in orders pace of 4.3 homes per month coupled with a relatively flat average active community count.

ASP on orders was up just slightly from 2022 due to geographic mix.

The cancellation rate of 8% in the third quarter of 2023 improved from 18% in 2022.

For the nine months ended September 30, 2023, the East Region delivered 3,827 home closings for $1.5 billion in home closing revenue, up 7.7% and 8.7%, respectively, compared to the 2022 period, with a 0.9% improvement in ASP on closings.

Order volume decreased 11.3% due to the combined impact of a 5.0% decrease in average active communities and a 6.8% decrease in orders pace for the nine months ended September 30, 2023.

Order value of $1.5 billion decreased 14.3% year over year due to decreased volume and a 3.3% decrease in ASP on orders.

Year-to-date, the East Region's cancellation rate of 11% is up slightly from 10% in the prior year, although still in line with historically normal rates.

The East Region ended the third quarter of 2023 with 1,473 homes in backlog valued at $608.6 million, down 44.9% and 46.2%, respectively, from 2,671 homes valued at $1.1 billion at September 30, 2022.

Land Closing Revenue and Gross Profit

From time to time, we may sell certain lots or land parcels to other homebuilders, developers or investors if we feel the sale will provide a greater economic benefit to us than continuing home construction or where we are looking to diversify our land positions in a specific geography or divest of assets that no longer align with our strategy.

As a result of such sales, we recognized land closing revenue of $24.4 million and $3.4 million for the three months ending June 30, 2023 and 2022, respectively, and profit of $0.2 million and $0.7 million for the three months ending June 30, 2023 and 2022, respectively.

As a result of such sales, we recognized land closing revenue of $2.8 million and $9.0 million and gross profit of $0.2 million and $0.4 million for the three months ending September 30, 2023 and 2022, respectively.

Year-to-date land sales resulted in profits of $1.9 million and $11.9 million for 2023 and 2022, respectively.

Other Operating Information (dollars in thousands)

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

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Companywide .

Gross profit for the second quarter of 2023 was $377.0 million, with a margin of 24.4%, declined 720 basis points from 31.6% in the second quarter of 2022 resulting from increased sales incentives, primarily interest rate locks and buy-downs, coupled with continued elevated labor, direct and lot costs.

Our use of mortgage rate locks and buy-downs did not begin to impact our home closing gross margins until the back half of 2022.

Sequentially, our gross margin improved 200

basis points from the first quarter of 2023, benefiting from our ability to start scaling back on incentives.

Similar to the second quarter, gross profit of $659.4 million and margin of 23.5% for the six months ended June 30, 2023, decreased from $822.4 million and 31.0% in 2022 due to higher production costs and increased sales incentives offered in response to buyer hesitancy that started in the back half of 2022.

The West Region delivered home closing gross margin of 18.4% for the second quarter of 2023 versus 30.6% in the second quarter of 2022.

The West Region experienced steep price appreciation over the past few years and through mid-2022, causing demand to slow substantially when interest rates rose in the back half of 2022 and buyers had affordability concerns.

To find the market clearing price, the West Region offered significant incentives, which combined with persistently higher direct and land development costs and weaker overhead leverage resulted in home closing gross margin deterioration.

Similar to the second quarter, the West Region home closing gross margin of 18.1% for the six months ended June 30, 2023 declined from 30.8% in the 2022 period.

The Central Region's second quarter 2023 home closing gross margin of 27.7%, was down only 440 basis points from 32.1% in the prior year quarter.

While ASP on closings increased due to geographic mix in Texas, the higher sales incentives, still elevated direct costs and increasing lot costs negatively impacted the Region's gross margin.

Compared to the first quarter of 2023, the Central Region's home closing gross margin improved 280 basis points due to fewer incentives.

Year-to-date, the Central Region gross margin of 26.3% in 2023 is down from 31.2% as a result of elevated sales incentives.

The East Region home closing gross margin of 27.3% in the second quarter of 2023 declined 470 basis points from 32.0% for the comparable 2022 period.

Similar to the other Regions, the home closing gross margin deterioration is due to the increased sales incentives, primarily interest rate locks and buy downs, and continued elevated direct costs that impacted the homebuilding industry nationwide.

Like the Central Region, the East Region also had a 280 basis point improvement in home closing gross margin sequentially from the first quarter of 2023 as we scaled back on incentives, and direct costs declined moderately.

For the six months ended June 30, 2023, the East Region home closing gross margin declined 490 basis points to 26.1%, similar to the second quarter of 2023.

Financial Services (Loss)/Profit (in thousands)

Three Months Ended June 30, Six Months Ended June 30,

Home closing gross profit for the third quarter of 2023 was $429.6 million with a home closing gross margin of 26.7%, down 200 basis points from 28.7% in the third quarter of 2022, due to increased buyer financing incentives and higher land development costs, partially offset by costs savings from shorter construction cycle times as direct costs were relatively flat year over year.

Home closing gross margin in the third quarter of 2022 included $8.8 million in charges associated with the termination of land purchase agreements, while only $0.2 million of such charges were recorded in third quarter of 2023.

For the nine months ended September 30, 2023, gross profit of $1.1 billion and gross margin of 24.7% decreased from $1.3 billion and 30.1% in 2022 due to the combined impact of higher direct costs and increased sales incentives.

The West Region home closing gross margin of 23.3% for the third quarter of 2023 declined 330 basis points from 26.6% in the third quarter of 2022.

The West Region contains some of our most expensive markets that were most impacted by

the volatile economic conditions that began in the latter half of 2022, both in terms of ASP as well as land costs, and has led us to offering significant incentives to assist homebuyers with monthly affordability.

The home closing gross margin for the third quarter of 2023 was impacted by these higher incentives and land development costs.

For the nine months ended September 30, 2023, the West Region home closing gross margin of 20.2% declined from 29.2% in the 2022 period due to higher incentives and elevated cost of production and land development.

The Central Region's third quarter 2023 home closing gross margin of 28.4% decreased from 30.1% in the prior year quarter, due to elevated incentives and increased land development costs.

Year-to-date, the Central Region gross margin of 27.0% in 2023 is down from 30.7%, mostly as a result of elevated sales incentives.

The East Region had the highest home closing gross margin in the Company, at 29.0% in the third quarter of 2023, a 90 basis point decline from 29.9% for the comparable 2022 period.

With relatively consistent direct costs, the East Region margin decline is due almost entirely to increased financing incentives.

The East Region's year-to-date home closing gross margin of 27.1% is down from 30.6% in 2022 as a result of higher sales incentives.

Financial Services Profit (in thousands)

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

Financial services (loss)/profit $ (2,557) $ 4,079 $ 366 $ 7,413

Financial services (loss)/profit represents the net (loss)/profit of our financial services operations, including the operating profit generated by our wholly-owned title and insurance companies, Carefree Title Agency, Inc.

Financial services profit $ 5,700 $ 4,842 $ 6,066 $ 12,255

Financial services profit represents the net profit of our financial services operations, including the operating profit generated by our wholly-owned title and insurance companies, Carefree Title Agency, Inc.

and Meritage Homes Insurance Agency, respectively, as well as our portion of earnings from a mortgage joint venture.

Financial services loss of $2.6 million in the three months ended June 30, 2023 includes $7.9 million in charges related to unused prepaid interest rate locks that expired in the second quarter of 2023, resulting in a year-over decrease of $6.6 million, versus profit of $4.1 million in the three months ended June 30 2022.

Similar to the second quarter results, year-to-date financial services profit decreased $7.0 million, primarily due to the write off of unused prepaid interest rate locks.

There were no similar charges in the three and six months ended June 30, 2022.

Excluding the write off of unused prepaid interest rate locks for the three and six months ended June 30, 2023, financial services profit increased over prior year due to higher home closing volume and geographical mix.

Financial services profit of $5.7 million in the three months ended September 30, 2023 increased from $4.8 million in the comparable prior year period due to higher home closing volume.

Financial services profit for the nine months ended September 30, 2023 decreased $6.2 million year over year, due primarily to $7.9 million in charges in the second quarter of 2023 related to unused prepaid interest rate locks that expired.

Selling, General and Administrative Expenses and Other Expenses (dollars in thousands)

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

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Other income/(expense), net $ 13,331 $ (74) $ 35,037 $ (849)

Loss on early extinguishment of debt $ (907) $ — $ (907) $ —

Provision for income taxes $ (63,974) $ (67,002) $ (150,664) $ (217,242)

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Commissions and other sales costs are comprised of internal and external commissions and related sales and marketing expenses such as advertising and sales office costs.

These costs increased $26.4 million to $95.8 million in the three months ended June 30, 2023, due to higher home closing revenue and increased

commissions and advertising activities.

Commissions and other sales costs were 6.2% of home closing revenue in the second quarter of 2023, up 130 basis points from 4.9% due to higher external commission rates and increased advertising to spur traffic in our communities.

Similar to the second quarter, commissions and other sales costs of $178.6 million were 6.4% of home closing revenue, increasing $43.7 million and 130 basis points, respectively, due to higher home closing revenue and elevated commissions and advertising spend.

These costs increased $21.2 million to $99.1 million in the three months ended September 30, 2023, due to higher home closing revenue and increased broker commissions.

As a percentage of home closing revenue, Commissions and other sales costs were up 120 basis points to 6.2% of home closing revenue in the third quarter of 2023 from 5.0% in 2022, due to increased commission rates reflective of the current sales environment as well as a higher external broker participation rate.

For the nine months ended September 30, 2023, Commissions and other sales costs of $277.8 million were 6.3% of home closing revenue, increasing $65.0 million and 130 basis points, respectively, due to increased commissions and advertising spend.

General and Administrative Expenses.

General and administrative expenses represent corporate and divisional overhead expenses such as salaries and bonuses, occupancy, insurance and travel expenses.

For the three months ended June 30, 2023, general and administrative expenses were $52.1 million, increasing proportionally with home closing revenue, and were 3.4% of home closing revenue in both the second quarter of 2023 and 2022.

For the six months ended June 30, 2023, general and administrative expenses were $99.7 million, up $11.7 million and 30 basis points from $87.9 million in the 2022 period, due primarily to severance-related expenses and increased spending on technology and insurance incurred in the first quarter of the year, as well as incremental expenses in newer markets as operations ramp up.

For the three months ended September 30, 2023, General and administrative expenses of $63.1 million increased $14.6 million from $48.4 million in 2022, and as a percentage of home closing revenue increased 80 basis points to 3.9% from 3.1%.

The increase in both dollars and as a percentage of home closing revenue is largely due to higher compensation costs, including increases as part of new and growing market operations, some of which are not yet producing offsetting earnings, as well as competitive pay adjustments to reflect current market conditions in many of our geographies.

For the nine months ended September 30, 2023, General and

administrative expenses were $162.8 million, up $26.4 million and 50 basis points from $136.4 million in the 2022 period, due primarily to higher compensation costs and increased spending on technology and insurance.

Interest Expense.

Interest expense is comprised of interest incurred, but not capitalized, on our senior notes, other borrowings, and our Credit Facility.

We recognized no interest expense for the three and months ended June 30, 2023 because all interest was capitalized to qualifying assets.

We recognized no interest expense in the three months ended June 30, 2022, and interest expense of $41,000 for the six months ended June 30, 2022.

We recognized no interest expense for the three and nine months ended September 30, 2023 as all interest was capitalized to qualifying assets.

We recognized no interest expense in the three months ended September 30, 2022, and interest expense of $41,000 for the nine months ended September 30, 2022.

Other Income/(Expense), Net.

Other income, net, primarily consists of (i) sublease income, (ii) interest earned on our cash and cash equivalents, (iii) payments and awards related to legal settlements and (iv) our portion of pre-tax income or loss from non-financial services joint ventures.

For the three and six months ended June 30, 2023, Other income was $12.9 million and $21.7 million, respectively, compared to net expense of $0.5 million and $0.8 million in the 2022 comparable periods.

Other income, net, primarily consists of (i) interest earned on our cash and cash equivalents, (ii) sublease income, (iii) payments and awards related to legal settlements and (iv) our portion of pre-tax income or loss from non-financial services joint ventures.

For the three and nine months ended September 30, 2023, Other income was $13.3 million and $35.0 million, respectively, compared to net other expense of $0.1 million and $0.8 million in the 2022 comparable periods.

The increase in both quarter and year-to-date is due to higher interest earned on larger cash and cash equivalents balances.

Loss on Early Extinguishment of Debt.

Loss on early extinguishment of debt of $0.9 million for the three and nine months ended September 30, 2023 is related to the $150.0 million partial redemption of our 2025 Notes.

There were no similar charges for the three and nine months ended September 30, 2022.

See Note 6 to the unaudited consolidated financial statements included in this report for more information related to the partial redemption of our 2025 Notes.

Income Taxes.

Our effective tax rate was 22.0% and 24.6% for the three months ended June 30, 2023 and 2022, respectively, and 21.4% and 24.3% for the six months ended June 30, 2023 and 2022, respectively.

The lower tax rate for the three and six months ended June 30, 2023 reflects energy-efficient homes tax credits on qualifying homes under the Internal Revenue Code ("IRC") §45L energy-efficient homes federal tax credit from the IRA that was enacted in August 2022.

There were no such credits available in the first half of 2022.

Our effective tax rate was 22.4% and 20.3% for the three months ended September 30, 2023 and 2022, respectively, and 21.8% and 22.9% for the nine months ended September 30, 2023 and 2022, respectively.

The higher effective tax rate for the three months ended September 30, 2023 is due to the catch-up of energy-efficient homes tax credits on qualifying homes under the IRC §45L energy-efficient homes federal tax credit from the IRA that was enacted in the third quarter of 2022.

The lower effective tax rate for the nine months ended September 30, 2023 reflects the increased per-home energy-efficiency credit amount starting in 2023.

Liquidity and Capital Resources

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Our principal uses of cash include acquisition and development of land and lots, home construction, operating expenses, share repurchases and the payment of interest, routine liabilities and dividends.

We also opportunistically repurchase our common stock and, from time to time, our senior notes.

We also opportunistically repurchase our senior notes, as we did this quarter with a $150.0 million partial redemption of our 2025 Notes.

Cash flows for each of our communities depend on their stage of the development cycle, and can differ substantially from reported earnings.

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Similarly, in times of community count growth, we incur significant outlays of cash through the land purchase, development and community opening stages whereas in in times of community count stability, these cash outlays are incurred in a more even-flow cadence with cash inflows from actively selling communities that are contributing closing volume and home closing revenue.

Conversely, in a down turn environment, cash outlays for land and community count growth may be scaled back.

Conversely, in a down turn environment, cash outlays for land and community count growth may be scaled back and we may curtail community count.

Short-term Liquidity and Capital Resources

Over the course of the next twelve months, we expect that our primary demand for funds will be for the construction of homes, as well as acquisition and development of both new and existing lots, operating expenses, including general and administrative expenses, interest and dividend payments and common stock repurchases.

In addition, we may opportunistically

retire or redeem a portion of our senior notes.

In addition, we may opportunistically retire or redeem a portion of our senior notes.

We expect to meet these short-term liquidity requirements primarily through our cash and cash equivalents on hand and the net cash flows provided by our operations.

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Long-term Liquidity and Capital Resources

Beyond the next twelve months, our principal demands for funds will be for the construction of homes, land acquisition and development activities needed to maintain our lot supply and active community count, payments of principal and interest on our senior notes as they become due or mature, payments of dividends and common stock repurchases.

We expect our existing and future generated cash will be adequate to fund our ongoing operating activities as well as providing capital for investment in future land purchases and related development activities.

Beyond the next twelve months, our principal demands for funds will be for the construction of homes, land acquisition and development activities needed to maintain our lot supply and active community count, payments of principal and interest on our senior notes as they become due or mature, common stock repurchases and payments of dividends.

We expect our existing and future generated cash will be adequate to fund our ongoing operating activities as well as provide capital for investment in future land purchases and related development activities.

To the extent the sources of capital described above are insufficient to meet our long-term cash needs, we may also conduct additional public offerings of our securities, refinance or secure new debt or dispose of certain assets to fund our operating activities.

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These obligations impact both short-term and long-term liquidity and capital resource needs.

Certain contractual obligations are reflected on our unaudited consolidated balance sheets as of June 30, 2023, while others are considered future commitments for materials or services not yet provided.

Certain contractual obligations are reflected on our unaudited consolidated balance sheets as of September 30, 2023, while others are considered future commitments for materials or services not yet provided.

Our contractual obligations primarily consist of principal and interest payments on our senior notes, loans payable and other borrowings, including our Credit Facility, letters of credit and surety bonds and operating leases.

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We do not engage in commodity trading or other similar activities.

We had no derivative financial instruments at June 30, 2023 or December 31, 2022.

We had no derivative financial instruments at September 30, 2023 or December 31, 2022.

Operating Cash Flow Activities

During the six months ended June 30, 2023, net cash provided by operating activities totaled $355.9 million, compared to net cash used in operations of $206.8 million during the six months ended June 30, 2022.

Operating cash flows in the first six months of 2023 benefited from cash generated by net earnings of $318.1 million.

Operating cash flows in the first six months of 2022 benefited from cash generated by net earnings of $467.3 million and an increase in accounts payable and accrued liabilities of $113.4 million due to timing of payments for routine transactions, offset by a $729.5 million increase in real estate assets largely related to the increase in homes under construction and a $90.4 million increase in other receivables, prepaids and other assets.

During the nine months ended September 30, 2023, net cash provided by operating activities totaled $460.1 million, compared to net cash used in operations of $169.8 million during the nine months ended September 30, 2022.

Operating cash flows in the first nine months of 2023 benefited from cash generated from net earnings of $539.9 million and were partially offset by a $137.5 million increase in real estate.

Operating cash flows in the first nine months of 2022 benefited from cash generated from net earnings of $729.8 million and an increase in accounts payable and accrued liabilities of $118.6 million due to timing of payments for routine transactions, offset by a $990.1 million increase in real estate and an $89.2 million increase in other receivables, prepaids and other assets.

The increase in real estate in both periods was due to construction activities on a greater number of homes under construction, land acquisition and development activities.

The increase in other receivables, prepaids and other assets for the first nine months of 2022 was largely due to receivables from municipalities for land development reimbursements and the purchase of fixed rate interest locks for eligible buyers in our backlog.

Investing Cash Flow Activities

During the six months ended June 30, 2023 and 2022, net cash used in investing activities totaled $22.1 million and $18.3 million, respectively.

Cash used in investing activities in the first half of 2023 was mainly attributable to the purchases of property and equipment.

Cash used in investing activities in the first half of 2022 was mainly attributable to the purchases of property and equipment of $12.9 million and investments in unconsolidated entities of $5.7 million.

During the nine months ended September 30, 2023 and 2022, net cash used in investing activities totaled $34.7 million and $24.9 million, respectively.

Cash used in investing activities in both periods was mainly attributable to the purchases of property and equipment and investments in unconsolidated entities.

Financing Cash Flow Activities

During the six months ended June 30, 2023 and 2022, net cash used in financing activities totaled $32.1 million and $121.1 million, respectively.

The net cash used in financing activities in 2023 includes $19.9 million of dividends paid and $10.0 million in share repurchases.

During the nine months ended September 30, 2023 and 2022, net cash used in financing activities totaled $238.2 million and $124.3 million, respectively.

The net cash used in financing activities in 2023 includes $150.0 million for the partial redemption of our 2025 Notes and associated early tender fees of $0.9 million, $55.0 million in share repurchases and $29.7 million of dividends paid.

The net cash used in financing activities in 2022 primarily reflects $109.3 million in share repurchases.

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Debt-to-capital and net debt-to-capital are calculated as follows (dollars in thousands):

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Senior notes, net, loans payable and other borrowings $ 1,005,420 $ 1,150,647

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We believe the ratio of net debt-to-capital is a relevant financial measure for investors to understand the leverage employed in our operations and as an indicator of our ability to obtain financing.

During the three months ended June 30, 2023, our Board of Directors approved, and we paid, a quarterly cash dividend on common stock of $0.27 per share.

Quarterly dividends declared and paid during the six months ended June 30, 2023 totaled $0.54 per share.

There were no such transactions in the three and six months ended June 30, 2022.

During the three months ended September 30, 2023, our Board of Directors approved, and we paid, a quarterly cash dividend on common stock of $0.27 per share.

Quarterly dividends declared and paid during the nine months ended September 30, 2023 totaled $0.81 per share.

There were no such transactions in the three and nine months ended September 30, 2022.

Credit Facility Covenants

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The Credit Facility also contains certain financial covenants, including (a) a minimum tangible net worth requirement of $2.8 billion (which amount is subject to increase over time based on subsequent earnings and proceeds from equity offerings), and (b) a maximum leverage covenant that prohibits the leverage ratio (as defined therein) from exceeding 60%.

We were in compliance with all Credit Facility covenants as of June 30, 2023.

Our actual financial covenant calculations as of June 30, 2023 are reflected in the table below.

We were in compliance with all Credit Facility covenants as of September 30, 2023.

Our actual financial covenant calculations as of September 30, 2023 are reflected in the table below.

Financial Covenant (dollars in thousands):

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis